Housing Is About to Become More Affordable

Mortgage rates, at the highest they have been in more than two decades, are forcing home builders to slash prices in an effort to boost floundering sales.

Builder confidence about the housing market for newly-built single-family homes declined for the fourth month in a row, the National Association of Home Builders/Wells Fargo Housing Market Index said on Thursday, and was at its lowest in more than a year in November, at a time when prices are elevated crowding out prospective buyers.

The sector is feeling the pressure of a high interest environment sparked by the Federal Reserve's hikes in a battle against soaring inflation. The rise in rates has helped push up borrowing costs for homes and business investment, including for builders.

In November, while the average share of builders who cut prices was unchanged at 6 percent, those who cut prices to attract buyers jumped to 36 percent from 32 percent over the last two months.

In October 2023, U.S. home prices shot up by 3.5 percent compared to last year at a median price of more than $410,000, according to data from real estate platform Redfin. The number of homes sold declined by more than 9 percent compared to the same time last year, they said.

"The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market," NAHB Chairman Alicia Huey, a home builder herself from Birmingham, Alabama, said in a statement. "Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory.

NAHB suggested that there are signs that the market may be getting some relief. The latest economic data indicates that the economy may be slowing and inflation cooling which could mean the era of rate hikes by the Fed are over. That may lead to a drop in mortgage rates, analysts have told Newsweek this week.

"There's some challenges in place, but our forecast is for about a 5 percent growth rate for single-family starts in 2024," Robert Dietz, NAHB's chief economist, told Newsweek, referring to the beginning of new house constructions.

High mortgage rates have held back supply as owners prefer to stay in their homes with low rates rather than sell and be forced to buy at elevated rates, Dietz said. The return of millennials to the market who have been shut out of the market because of elevated prices and high rates could see a return next year, he added.

"As mortgage rates decline in 2024—and we do think that will happen in our forecast—that demand is going to get priced back into the market," Dietz told Newsweek.

He added that his expectation is the Fed will probably cut their funds rate once or twice in the back half of next year.

"We're expecting mortgage interest rates to settle in at 6 and a half percent or lower by the end of next year," he said.

Earlier, Dietz said in a statement that the 10-year treasury rate—which tends to track the fate of mortgage rates—had come down to the 4.5 percent range for the first time since late September, which will help lower mortgage rates for a home potentially to below 7.5 percent.

"Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December," Dietz said.

On Thursday, there was evidence that this may have begun to happen.

Mortgage lender Freddie Mac said that the 30-year fixed-rate mortgage had averaged at 7.44 percent over the last week.

"For the third straight week, mortgage rates trended down, as new data indicates that inflationary pressures are receding," Sam Khater, Freddie Mac's chief economist, said in a statement. "The combination of continued economic strength, lower inflation and lower mortgage rates should likely bring more potential homebuyers into the market."